Sonic hedgehog, Patched and Gli are components of a mammalian signalling pathway that has been conserved during evolution and which has a central role in the control of pattern formation and cellular proliferation during development. Here we identify the human Suppressor-of-Fused (SUFUH) complementary DNA and show that the gene product interacts physically with the transcriptional effector GLI-1, can sequester GLI-1 in the cytoplasm, but can also interact with GLI-1 on DNA. Functionally, SUFUH inhibits transcriptional activation by GLI-1, as well as osteogenic differentiation in response to signalling from Sonic hedgehog. Localization of GLI-1 is influenced by the presence of a nuclear-export signal, and GLI-1 becomes constitutively nuclear when this signal is mutated or nuclear export is inhibited. These results show that SUFUH is a conserved negative regulator of GLI-1 signalling that may affect nuclear–cytoplasmic shuttling of GLI-1 or the activity of GLI-1 in the nucleus and thereby modulate cellular responses.